CIO & PM of leading sector ETF explains what has been impacting leading names and why he still sees strong long-term prospects
Through the first quarter of 2025, the US health care sector was in a good spot. Market rotation towards more defensive areas from technology growth leaders was putting a tailwind behind the sector. The initial rounds of tariff rhetoric — focused on just Canada, Mexico, and China — were largely shrugged off by health care investors, at least until liberation day. The market pullback following the announcement of major global tariffs impacted health care, and the subsequent market recovery has been led by more of those growth names, leaving sectors like healthcare behind.
Now, in addition to those tariff overhangs and macro dynamics, US politics are playing out in the country’s healthcare sector again. A mixture of tariff and trade policy, political rhetoric, and the Medicaid cuts in the Big Beautiful Bill have introduced political risk into US healthcare names. Despite these risks, Paul MacDonald — CIO & Portfolio Manager at Harvest ETFs and lead manager of the Harvest Healthcare Leaders Income ETF (HHL) — explains that there are reasons to remain constructive on the sector long-term.
“Health care is a political lightning rod. When US politicians need to catch some lightning, they talk health care,” MacDonald says. “Market reactions to the tariffs was swift in both bonds and equities, and a bit of a narrative pivot was needed. Amidst that we got a lot of posturing around health care policy, which has caused a negative sentiment and uncertainty to roll in. It will roll out, we just don’t have the catalyst for that yet.”
MacDonald notes that the relative dearth of hard data through this period and the policy risk overhangs have investors primed to take positive news about the sector well. He notes Johnson & Johnson’s earnings beat announced Wednesday morning as an example of how this sector can pop.
While US tariff policy had begun with specific carve-outs for drugs, as increasing drug prices would not set up the Republican party well for midterm elections, MacDonald notes a number of policy and rhetorical signals that the market took poorly. The role of Robert F. Kennedy Jr. as secretary of Health and Human Services has largely not been taken well, given his past anti-vaccine statements and willingness to revisit the vaccine approvals process. The cuts brought one by DOGE, too, saw meaningful reductions in research funding and cuts to key organizations like the FDA — which plays an essential role in the approval of new medicines.
More recently, we saw President Trump threaten 200 per cent tariffs on pharmaceuticals, and then fail to make further mention of it. The tone, MacDonald says, is one of arbitrary and unclear decision making. That has introduced a degree of uncertainty that, in turn, could see pullbacks in R&D spending until impacted companies gain greater clarity.
The changes to Medicaid in the Big Beautiful Bill could also have significant impacts on the managed care side of the US healthcare industry. Those changes include roughly one trillion dollars of spending cuts, including working hour minimums for eligible people, and could result in general cuts to healthcare in certain areas as population cohorts become less eligible for the program. From a business perspective, MacDonald notes that there could be adjustments made to manage lost Medicaid revenues and that there could be other areas of the market that see increased profitability. Moreover, he expects there may well be policy changes in future given how narrow passage of the Big Beautiful Bill was.
Looking forward, MacDonald believes healthcare investors need two major shifts to re-catalyze growth. The first is a broad market sentiment shift back towards those defensive names that brings more breadth back to the market. The second is clarity around trade and tariff policy, especially as it pertains to pharmaceuticals. Despite cloudy circumstances and the issues that arise from scattershot rhetoric, MacDonald reminds investors that this is not completely unfamiliar territory for US healthcare companies.
“For these companies, this is par for the course,” MacDonald says. “They have navigated over multiple cycles and have continued to grow in the medium and longer term. Right now you’re buying in at valuations relative to the market that go back to the ‘90s. It’s rare, if at all, that we’ve seen these types of valuation discrepancies within the sector. It’s still an area with permanent non-cyclical drivers.”
